Under pressure Infosys recalls Narayana Murthy as chairman

June 01, 2013|Prashant Mehra and Harichandan Arakali | Reuters

(Vivek Prakash Reuters, )

MUMBAI/BANGALORE (Reuters) - India's No. 2 IT services firm Infosys Ltd, grappling with disappointing results and loss of market share, has recalled founder and former chairman N.R. Narayana Murthy to act as executive chairman for five years.

He replaces current chairman K.V. Kamath, who will become lead independent director. Current co-chairman S. Gopalakrishnan will become executive vice chairman, while CEO S.D. Shibulal remains in his position, Infosys said.

"The board has taken this step keeping in mind the challenges that the technology industry and the company faces," Kamath said in a statement on Saturday, also acknowledging calls from shareholders to strengthen leadership of the company.

Infosys, for years an investor favorite for exceeding its earnings targets, has struggled in the past two years as big customers in the United States and Europe cut costs and rivals such as Tata Consultancy Services and HCL Technologies Ltd take away market share.

In April, Infosys forecast full-year sales growth that missed analyst expectations by a margin of up to 50 percent, pushing down its shares to their lowest close in a decade.

"This is a drastic, some might say, welcome move," said Ankur Rudra, sector analyst at Ambit Capital, which has a "sell" rating on the stock. "Probably, this could be a step towards a new strategic direction and leadership as well."

Murthy has long been the dominant figure at Infosys, which he calls his "middle child". He was its first CEO and chairman until 2002, when fellow founder Nandan Nilekani took up the CEO position. Murthy was chairman and "chief mentor" until 2011.

"He's one person who's not afraid to make changes, not afraid to take decisions and not afraid to take risks, but it's been a while," said Subhash Dhar, who was a senior vice president and member of Infosys's executive council before quitting to form his own software firm.

"At least as a CEO, it's been 11 years and it will be very different times, a very different company."

Murthy's recall is the third instance in recent months where a major company has brought back an old hand. Last month, Procter & Gamble Co recalled former CEO and Chairman A.G. Lafley to run the world's largest household products maker, while former CEO Myron Ullman returned to struggling department store chain J.C. Penney in April.

'SUDDEN, UNEXPECTED'

Infosys has struggled to implement its "Infosys 3.0" push for revenue through development of its own software platforms, amid sluggish demand from clients in core western markets.

Its troubles have spurred criticism of everything from its pricing strategy, to what is seen as an insular and risk-averse culture, to its method of choosing CEOs.

While Murthy defended Infosys's strategy of going after higher-value services that would boost growth without adding jobs, he said "the need of the day is to enhance our focus" on large contracts in those areas that still account for the biggest chunk of industry revenue.

"I think his personal focus will be rejuvenating the sales force and getting the sales engine going again," said T.V. Mohandas Pai, a former CFO and board member of Infosys.

Murthy, 66, said his recall was "sudden, unexpected and most unusual," but said he felt he could still add value.

At a press conference in Bangalore, the south Indian IT hub where the company is based, he said Kamath had invited him to take up the role in early May. He had consulted with both Gopalakrishnan and Shibulal before accepting the offer.

Murthy will set up a team to assist him, including his son Rohan Murty as his executive assistant. Rohan Murty is a fellow at Harvard University, where he earned a PhD in computer science.

"The only role Rohan has is to make me more effective," Murthy said to questions on whether his son would assume an executive role. Murthy and his son, as well as Gopalakrishnan and Shibulal, will each be paid one rupee per year.

On Saturday, the Economic Times newspaper reported the Infosys board had begun an exercise to identify a successor to Shibulal, whose term as CEO expires in March 2015. It said the company may hire a search firm to identify external candidates, and would also start interviewing internal candidates.

Shibulal is one of seven engineers who launched the company in 1981 by pooling together $250. All four Infosys CEOs have been from this group. Since he became CEO on August 20, 2011, Infosys shares are up 8.4 percent, lagging the 28 percent gain in the Indian IT sector subindex.